DR 98-049
                                     
                         Northern Utilities, Inc.
                                     
                 Recovery of Environmental Response Costs
                                     
                   Order Approving Settlement Agreement
                                     
                         O R D E R   N O.  23,046
                                     
                             October 27, 1998

         APPEARANCES:  LeBoeuf, Lamb, Greene & MacRae by Meabh
     Purcell, Esq. for Northern Utilities, Inc.; the Office of the
     Consumer Advocate by Kenneth E. Traum on behalf of residential
     ratepayers; and Michelle A. Caraway and Stephen P. Frink for the
     Staff of the New Hampshire Public Utilities Commission.
     
     
     I.   PROCEDURAL HISTORY
               On April 13, 1998, Northern Utilities, Inc. (Northern)
     filed with the New Hampshire Public Utilities Commission
     (Commission) a Petition for Approval of an Environmental Response
     Costs (ERC) Rate Adjustment Tariff establishing a mechanism for
     recovery of Northern's ERC and other related tariff changes. 
     ERCs are incurred in the assessment, remediation, and monitoring
     of Northern's former manufactured gas plants (MGPs) in New
     Hampshire.
               Pursuant to federal and state environmental laws,
     Northern is required to investigate and remediate the sites of
     former MGPs in Rochester and Exeter, New Hampshire, owned and/or
     operated by Northern's predecessors, on which hazardous materials
     from the MGP operations have been found.  The proposed recovery
     mechanism as filed was designed to recover actual annual ERC
     expenditures including carrying costs over a five-year period,
     plus one-half of related insurance and third-party expenses, and
     less one-half of related insurance and third-party recoveries.
               On May 11, 1998, the Commission issued an Order of
     Notice which scheduled a Prehearing Conference for June 10, 1998. 
     The Order of Notice also set deadlines for intervention requests
     and objections thereto and outlined a proposed procedural
     schedule.  No Motions to Intervene were filed.  The Office of the
     Consumer Advocate (OCA) is a statutorily recognized intervenor. 
     On June 23, 1998, the Commission issued Order No. 22,962
     approving the procedural schedule.
               On August 6, 1998, Northern filed a Motion for
     Protective Order pertaining to Northern's efforts to seek
     insurance recovery of the costs it incurs to remediate its former
     MGP sites, including but not limited to details of Northern's
     negotiations, settlement discussions, and dealings with its
     insurance carriers, as well as those of its parent company, Bay
     State Gas Company.  On September 1, 1998, the Commission issued
     Order No. 23,006 granting Northern's request for confidential
     treatment. 
     
               On August 13, 1998, the Commission approved Staff's
     request to change certain dates of the procedural schedule.  Also
     on August 13, 1998, a technical session/settlement conference was
     held at which Northern, the OCA and Staff reached an agreement in
     principle.  
               Subsequent to the technical session/settlement
     conference, Northern, the OCA and Staff entered into a Settlement
     Agreement (Settlement).  On October 1, 1998, Northern filed the
     Settlement, which was executed by Northern, the OCA and Staff. 
     The Settlement resolves all of the issues in this proceeding.  On
     October 7, 1998, a hearing was held before the Commission at
     which time testimony supporting the Settlement was presented to
     the Commission.
     II.  SETTLEMENT AGREEMENT
               Northern, the OCA and Staff agree that Northern's
     petition, as set forth in the April 13, 1998 filing, is in the
     public interest and should be approved, subject to the following
     modifications contained in the Settlement Agreement:
     1.   Prudence of MGP Operations.
     
          Northern and Staff agree that based upon the information
               submitted by Northern, the Commission should find that the waste
               products from the MGPs were disposed of by Northern's
               predecessors in a prudent manner and in accordance with the
               practices of the time, and that the resulting condition of the
               properties is consistent with such operations.  The OCA takes no
               position with regard to the foregoing.
     
     2.   Implementation Date.
     
          An Environmental Response Cost Adjustment (ERCA) rate developed
               to recover ERCs, consistent with the provisions of this
               Settlement, shall be charged to firm gas sales and transportation
               customers on a per therm basis and shall take effect on November
               1, 1998.  The ERCA is described in complete detail in the
               proposed ERCA tariff, N.H.P.U.C. No. 8-Gas, Original Pages 67 and
               68.
     
     3.   Environmental Response Cost Recovery Mechanism.   
     
          Beginning on November 1, 1998, Northern shall recover from its
               firm gas sales and transportation customers over a seven year
               amortization period, without carrying charges, the unamortized
               balance of the deferred ERCs of approximately $517,095 that it
               has incurred through June 30, 1998.  Following Commission
               approval of this Settlement, Northern shall also defer and
               recover through the ERCA, over separate seven year amortization
               periods, without carrying charges, all prudent and reasonable
               ERCs that it incurs after June 30, 1998.  The annual cost period
               shall be from July 1 through June 30 (Annual ERC Period) and the
               annual recovery period shall be November 1 through October 31
               (Annual ERC Recovery Period).
     
               One hundred percent (100%) of the reasonable external
               costs/expenses of any amounts resulting from any claims that
               Northern has pursued or will pursue against insurance companies
               that might have insured Northern (or its predecessors) for the
               risks and/or costs now being recovered through the ERCA
               (Insurance Claims) and/or against third parties that might bear
               responsibility for any ERCs that are or will be incurred by
               Northern (Third Party Claims) shall be included in the
               calculation of the ERCA.
     
               One hundred percent (100%) of any recoveries or other
               benefits received by Northern as a result of a judgment,
               settlement or otherwise from Insurance or Third Party Claims
               shall be credited to its ratepayers by reducing the unamortized
               balance of the ERCs, thus shortening the amortization period
               rather than reducing the per therm amount of the ERCA. 
               Commencing July 1, 1999, Northern shall credit to ratepayers the
               amount of any carrying charges, calculated at the prime rate
               reported in the Wall Street Journal, earned on average monthly
               over-recoveries until such time as the over-recoveries are offset
               by ongoing ERC expenditures.  The interest rate is to be adjusted
               each quarter using the prime interest rate as reported in the
               Wall Street Journal on the first date of the month preceding the
               first month of the quarter.
     
               Prior to filing its next ERCA and for purposes of future
               ERCA calculations, Northern will apply the recoveries associated
               with Insurance and Third Party Claims received during the prior
               Annual ERC Period by reducing or eliminating the one-seventh
               amortized amount scheduled to be recovered in the most future
               Annual ERC Recovery Period, and then reducing or eliminating the
               one-seventh amount scheduled for recovery in the next most future
               Period, and so forth.  Whenever there are more than one
               one-seventh amortized amount in any Period, the first amount to
               be reduced or eliminated will be the one associated with the most
               historical Annual ERC Period, followed by the next most
               historical, and so forth.
     
               Northern shall file and have in effect a tariff establishing
               an ERCA.  The ERCA will be an adjustment added to base rates.  In
               addition, Northern shall file, and have in effect, rate schedules
               for all firm sales and transportation rates which incorporate a
               provision allowing for the applicability of the ERCA.  The ERCA
               is designed to recover annual historical actual ERCs without
               carrying costs, including one hundred percent (100%) of insurance
               and third-party costs, over a seven year amortization period with
               one hundred percent (100%) of insurance and third-party
               recoveries to be applied to reduce the amortization period. 
               Actual ERCs shall be accumulated in twelve month periods ending
               each June 30.  One seventh of each annual actual ERC expenditure
               will be collected every year over seven annual periods beginning
               each November 1 and extending through October 31, the Annual ERC
               Recovery Period.
     
               The ERCA rate shall become effective each November 1,
               coincident with the winter period cost of gas adjustment (CGA). 
               The ERCA rate shall be adjusted each November 1.  On or before
               each September 16, at the same time Northern makes its winter CGA
               filing, Northern will seek Commission approval to adjust its ERCA
               to be effective on the upcoming November 1.  The adjusted ERCA
               will reflect one-seventh of the ERCs incurred for the latest
               Annual ERC Period, the expiration of any ERCs that have been
               fully recovered over a seven year period, or eliminated by
               application of insurance and/or third party recoveries, and the
               reconciliation of the recovery of the ERCs over the previous
               Annual ERC Recovery Period (reflecting projected collections for
               September and October).  The reconciliation is derived by
               determining the difference between the historical amortized costs
               intended to be recovered in the Annual ERC Recovery Period and
               the actual annual ERC collections.  Any under- or over-recoveries
               will be charged or credited towards the actual ERCs to be
               collected during the upcoming Annual ERC Recovery Period
               effective November 1.
     
          
               The total amount of costs to be recovered during any Annual      ERC Recovery Period shall not exceed five percent (5%) of
                                                                                     Northern's total firm revenues from gas sales customers during
                                                                                     the most recent Annual ERC Period plus total firm revenues from
                                                                                     gas transportation customers during the most recent Annual ERC
                                                                                     Period, adjusted to include Northern's unit gas supply costs by
                                                                                     rate class or system average gas costs.  If this 5% cap is
                                                                                     projected to be exceeded, Northern shall defer any excess ERC
                                                                                     amount for recovery during the next Annual ERC Recovery Period in
                                                                                     which deferred amounts can be collected under the 5% cap. 
                                                                                     Northern shall recover carrying charges on the unamortized
                                                                                     balance of the amounts deferred due to exceeding the cap.
     
               On or before each September 16, Northern shall file with the
               Commission and the Parties all bills and receipts relating to, as
               well as depicting the particular purpose for, any ERCs including
               costs for preliminary testing and site evaluation incurred in the
               preceding historical Annual ERC Period for which it seeks to
               begin recovery through the ERCA.  In that same filing, Northern
               shall include similar material and information to support any
               costs/expenses and/or recoveries resulting from Insurance and/or
               Third Party Claims pertaining to the same preceding historical
               Annual ERC Period.  The Parties may contest the reasonableness
               and prudence of the specific ERCs described on the bills and
               receipts but may not contest the general framework for ERC
               recovery established by this Settlement.
     
               In the event that Northern should, after this Settlement,
               sell, lease, or transfer all or part of the properties acquired
               in the course of remediation whose costs have been recovered
               through the ERCA, Northern shall flow the net proceeds to
               customers through the ERCA.  In the event that Northern should,
               after the date of this Settlement, sell, lease, or transfer to a
               non-utility all or part of affected properties which are in rate
               base, customers would have the benefits associated with utility
               ownership of the property.
     
     III. COMMISSION ANALYSIS
               After careful review of the Settlement Agreement and
     the testimony and exhibits offered at the October 7, 1998
     hearing, we find that the Settlement Agreement is reasonable and
     in the public good.  We agree with Northern and Staff that the
     waste products from the Rochester and Exeter, New Hampshire MGP
     sites were disposed of by Northern's predecessors in what was
     considered at that time to be a prudent manner and in accordance
     with the practices of the time.  Therefore, we approve the
     recovery mechanism agreed to by Northern, the OCA and Staff and
     will evaluate the actual rate itself within the context of
     Northern's winter 1998/1999 cost of gas adjustment proceeding.
               We are pleased that Northern is aggressively pursuing
     avenues for insurance and third party recoveries.  Any recoveries
     obtained by Northern have the potential to significantly reduce
     the remediation costs Northern seeks to recover from its
     ratepayers, thereby providing a real benefit to Northern's
     customers.  Therefore, we encourage Northern to continue pursuing
     recoveries which are prudent and in the public good.  
               Consistent with prior decisions regarding EnergyNorth
     Natural Gas, Inc.'s (ENGI) Concord MGP site, we find that some
     sharing of the burden of the remediation costs between ratepayers
     and shareholders is appropriate.  The recovery mechanism in the
     Settlement which prohibits carrying costs or rate base treatment
     of the deferred asset ensures that remediation costs shall be
     borne by both ratepayers and shareholders.  It is also consistent
     with our decision for ENGI in Order No. 21,710 (June 26, 1995)
     which states:
     
          Consistent with the recovery mechanism approved in DR 93-168, any
               recovery, such as settlement with UGI, net of costs, will reduce
               the total amount to be recovered through rates.  But rather than
               simply lowering the amount to be collected over the remaining
               amortization period, we will require ENGI to credit the recovery
               to the end of the amortization period, thereby shortening the
               time of ratepayer recovery.  This should serve as an additional
               incentive to ENGI to obtain any potential recovery quickly, as
               the amount recovered will reduce the carrying costs being
               absorbed by shareholders.
     
     
     We continue to believe that our decision in Order No. 21,710 to
     apply third party recoveries to reduce the amortization period
     serves as a strong incentive for the utilities to reduce the
     costs borne by its ratepayers for environmental remediation. 
               Northern's witness Mr. Ferro testified that over a
     seven-year period, shareholders will absorb approximately 25% of
     the remediation costs by not allowing carrying costs on the
     unamortized balance of the deferred asset.  Additionally, Mr.
     Ferro stated that shareholders have borne the carrying costs
     associated with the environmental and recovery effort expenses
     incurred since the Commission last authorized recovery in
     Northern's last rate case (DR 91-081).            
               Consistent with our conclusions in Order No. 21,710 and
     22,943 (May 19, 1998) for ENGI, we will require Northern to
     report each year, as part of its winter cost of gas adjustment
     proceeding, the status of the cleanup recovery efforts with third
     parties.  If there are adjustments necessary to the ERCA,
     Northern and any other party or Staff should make recommendations
     as part of that proceeding. 
               Finally, the Settlement Agreement proposed that the
     ERCA take effect November 1, 1998.  We waive the application of
     N.H. Admin. Rules, Puc 1203.05(a), which requires generally that
     rate changes be implemented on a service-rendered basis, and will
     allow Northern to implement its ERCA on a bills-rendered basis. 
     This waiver, pursuant to Puc 201.05, produces a result consistent
     with the principles embodied in Puc 1203.05(b), which sets forth
     exceptions for allowing rate changes on a bills-rendered basis,
     and is in the public interest because it eliminates customer
     confusion and reduces administrative costs.
               Based upon the foregoing, it is hereby 
               ORDERED, that the Settlement Agreement is APPROVED;  
     and it is
               FURTHER ORDERED, that Northern's Environmental Response
     Charge Adjustment shall be effective with bills-rendered for the
     first November 1998 billing cycle; and it is
               FURTHER ORDERED, that the ERCA rate and supporting
     documentation be reviewed by Staff in Northern's winter 1998/1999
     cost of gas adjustment proceeding (DR 98-161) in which docket the
     rate for the November 1, 1998 through October 31, 1999 period
     will be approved; and it is 
               FURTHER ORDERED, that Northern shall file compliance
     tariff pages within ten days of the date of this order.
               By order of the Public Utilities Commission of New
     Hampshire this twenty-seventh day of October, 1998.
     
     
     
     ________________    ________________    ________________          
     Douglas L. Patch    Susan S. Geiger     Nancy Brockway
        Chairman          Commissioner        Commissioner
     
     Attested by:
     
     
     
                                      
     Thomas B. Getz
     Executive Director and Secretary